Trading Wal-Mart Ahead Of Earnings

May.15.13 | About: Wal-Mart Stores, (WMT)

The world's largest retailer is due to report its first quarter fiscal 2014 earnings results on May 16 amid an era of change for Wal-Mart (NYSE:WMT) and daunting household financial challenges for its U.S. consumer base. On May 14, WMT shares closed at $78.78 per share as investors position themselves for the company's most recent financial results. Although Wal-Mart is among the most dependable corporations in the U.S. in terms of business operations and earnings growth, by the company's own admission the retail giant faced stiff headwinds in the form of beleaguered consumers that were beset by persistently high unemployment, a payroll tax increase, and delayed tax refund checks in the first quarter of WMT's fiscal 2014. Wal-Mart executives lamented that February 2013 sales were - at the time - off to the worst start in seven years, which immediately followed reports of disappointing January sales results, according to leaked internal e-mails published by Bloomberg on February 16. Wal-Mart's senior vice president of U.S. replenishment summed up the company's lackluster performance in January in a succinct quote by saying, "Where are all the customers? And where's their money?"

With less money in their pockets to spend at Wal-Mart stores, many customers were believed to have either held onto their cash or sought out less expensive alternatives at discount retailers like Dollar Tree (NASDAQ:DLTR), Family Dollar (NYSE:FDO), and Dollar General (NYSE:DG) that cater to a less affluent market niche than WMT. In either case, Wal-Mart executives acknowledged the difficulties in the retail environment in the opening months of 2013 as they released the company's fourth quarter fiscal 2013 financial results, when management provided guidance below analysts' consensus earnings per share for the first quarter of fiscal 2014. Specifically, analysts had originally been looking for first quarter fiscal 2014 earnings of $1.18 per share and Wal-Mart management reduced guidance to a range of $1.11 to $1.16 earnings per share. The current consensus earnings figure has analysts forecasting $1.15 EPS, which is only slightly below the top end of management's guidance for the quarter. By acknowledging the difficulties in a timely manner and keeping analysts aware of the challenges in the early months of 2013, Wal-Mart management likely prevented any major surprises or disappointments resulting from overblown expectations ahead of the release of Thursday's earnings report.

Despite the headwinds facing the largest retail company in the world, shares of WMT have risen a very respectable 15 percent year-to-date in 2013. For a corporate Goliath with a $261 billion market capitalization, a double digit rate of return after only five months in the imposing economic environment facing retailers of all sizes shows the market's tremendous confidence in Wal-Mart's management that it can execute at the highest performance levels. Related to this faith in Wal-Mart's executives is the consequential selection of a new chief executive officer for WMT that is looming in the coming months and anticipated to be announced in the second quarter of the company's fiscal 2014, according to a May 7 Bloomberg report. Although current CEO Mike Duke is not expected to hand responsibilities over immediately to a new chief executive, the public announcement of the individual the company's board determines to be his successor will be a signal to investors of the direction Wal-Mart's leadership will take for years to come. It is important to remember that Wal-Mart has only had four different chief executive officers in the company's history of just over 41 years since WMT stock went public in 1972 on the New York Stock Exchange. Since Wal-Mart founder Sam Walton left as CEO in 1988, the company has only had three chief executive officers during the span of a quarter century. Although the new CEO is unlikely to be revealed on the May 16 quarterly earnings report and conference call, the final two candidates to take over leadership of WMT are an insider with a 29-year career at Wal-Mart, who is currently the head of its international operations, and the chief of the company's U.S. stores that has only been with the retailer since 2006. Analysts will undoubtedly be looking for clues and asking pointed questions about the company's succession plan and the timing of Duke's departure as CEO in an effort to gauge any effect on Wal-Mart's leadership and potential impact on WMT's financial prospects.

Insights into technical analysis on the WMT chart reveal that the stock is trading right at its current respective 8-day and 20-day exponential moving averages at the $78.62 and $78.24 price levels. Shares of WMT successfully tested these indicators in a similar convergence of the stock's price with the two EMAs in both late-February and mid-March before rising in powerful rallies, particularly for a company with such an enormous market capitalization. Specifically, the first similar 8-day and 20-day price convergence of 2013 resulted in a subsequent two week rally in which WMT gained 5 percent, which was based on the market's reaction in the wake of the fourth quarter fiscal 2013 earnings report on February 21. The latest similar confluence of such indicators on the WMT chart occurred in the middle of March in the days following Wal-Mart's dividend payment to shareholders, which saw the stock increase approximately 10 percent in the month after the disbursement. Significantly, Wal-Mart executives announced the company was increasing its dividend by 18 percent for fiscal year 2014 to an annualized payment of $1.88 per share. The higher dividend makes WMT a more attractive stock from a yield perspective with a 2.39 percent rate at the stock's current price of $78.78 per share.

As Wal-Mart prepares to report its financial results on May 16, shares of WMT are trading less than one dollar below their all-time high of $79.50 per share that was set intra-day on April 24. With the company's long history of consistent earnings growth and its titanic market capitalization, analysts have a solid understanding of WMT's financial prospects ahead of each quarterly financial report and this company is not one to surprise its investors. The first quarter fiscal 2014 earnings announcement will likely be no exception to this tradition. Currently, analysts have 13 buy, 12 hold, and 1 sell rating on WMT with a consensus $80 price target on the stock. It is important to note that the all-time high for WMT is $79.50, which potentially means analysts will have to reconsider the $80 consensus and outliers on the low end may have to boost their estimates in the wake of management's Q2 fiscal 2014 guidance. For potential investors interested in adding a solid performer, dependable dividend yield, and consistent earnings with the safety of a blue-chip stock, WMT looks like a great buy as it is poised to break above its all-time high after the company reports its financial results on May 16.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.